Ternium S.A. Form 6-K Summary: Consolidated Financial Statements for the Year Ended December 31, 2018
Business Context and Reporting Period
This filing presents the consolidated financial statements of Ternium S.A., a global steel and mining company, for the fiscal year ended December 31, 2018. The report was filed with the SEC on February 19, 2019. Ternium operates primarily in Mexico, Argentina, Brazil, and other Latin American markets, with segments focused on Steel (flat and long products) and Mining (iron ore and pellets). The financial statements are prepared in accordance with IFRS and presented in thousands of U.S. dollars.
Key Financial Metrics
| Metric (USD Thousands) | 2018 | 2017 |
|---|---|---|
| Net Sales | 11,454,807 | 9,700,296 |
| Gross Profit | 2,971,479 | 2,297,271 |
| Operating Income | 2,108,371 | 1,456,784 |
| Profit for the Year | 1,662,132 | 1,022,927 |
| Profit Attributable to Owners | 1,506,647 | 886,219 |
| Earnings Per Share (Basic & Diluted) | $0.77 | $0.45 |
| Net Cash Provided by Operating Activities | 1,739,265 | 383,859 |
| Total Borrowings (Current + Non-Current) | 2,036,957 | 3,221,907 |
| Cash and Cash Equivalents | 250,541 | 337,779 |
| Total Assets | 12,547,862 | 12,122,566 |
| Total Equity | 7,484,576 | 5,852,771 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by approximately 18% to $11.45 billion, driven by higher volumes and prices in the steel segment, particularly in Mexico and Brazil.
- Profitability Surge: Profit for the year rose 63% to $1.66 billion. Operating income increased by 45% to $2.11 billion, reflecting improved gross margins (26% in 2018 vs. 24% in 2017) and controlled SG&A expenses.
- Debt Reduction: Total borrowings decreased significantly by $1.19 billion (37%) to $2.04 billion, primarily due to prepayments on the syndicated facility used to finance the 2017 acquisition of Ternium Brasil.
- Operating Cash Flow: Net cash from operating activities improved dramatically to $1.74 billion from $384 million in 2017, aided by strong earnings and better working capital management.
- Accounting Policy Change: The company applied IAS 29 (Financial Reporting in Hyperinflationary Economies) to its Argentine subsidiaries starting July 1, 2018, due to Argentina's cumulative inflation exceeding 100% over three years. This resulted in a positive inflation adjustment result of $191.4 million in the income statement.
Guidance, Outlook, Risks, and Unusual Items
- Hyperinflation in Argentina: The adoption of IAS 29 for Argentine operations is a significant unusual item. While it generated a positive inflation adjustment in the income statement, it also resulted in a currency translation adjustment loss of $376 million in Other Comprehensive Income (OCI) due to the devaluation of the Argentine peso (50.5% in 2018).
- Contingencies:
- Ternium Brasil Tax Issues: Significant provisions remain regarding ICMS tax credits and unconstitutionality claims in Brazil. As of Dec 31, 2018, a provision of $46.9 million was recorded for tax assessments and $529.4 million for the ICMS deferral tax benefit contingency (with a corresponding asset for recovery).
- Legal Litigation: Ongoing litigation includes a class action in the U.S. regarding the "Notebooks Case" involving the former chairman and CEO, and a tender offer lawsuit in Brazil involving Usiminas shares (no provision recorded as claims are deemed groundless).
- Subsequent Event: On February 13, 2019, Techgen (a 48% owned power plant) entered into a $640 million refinancing agreement, releasing Ternium's corporate guarantee on the previous facility.
- Dividends: The company paid cash dividends of $215.9 million to shareholders in 2018 ($0.11 per share).
Investor Verification Checklist
- Argentina Exposure: Verify the impact of continued currency devaluation and inflation on the valuation of Argentine assets and future repatriation of earnings.
- Brazil Tax Contingencies: Monitor the status of the ICMS tax benefit unconstitutionality case and the Rio de Janeiro State Treasury assessments, which represent significant potential liabilities.
- Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios on the remaining syndicated facilities, particularly the $1.125 billion facility for Ternium Brasil.
- Usiminas Investment: Review the market value vs. carrying value of the Usiminas stake (Market: ~$736.5M vs. Carrying: $480.1M) and the implications of the new shareholders' agreement.
- Working Capital: Analyze the components of the $228.6 million decrease in working capital cash flow, noting the impact of exchange rate variations on non-monetary items.